Economics – Reasons for government intervention in markets | e-Consult
Reasons for government intervention in markets (1 questions)
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A price subsidy on healthy food can improve consumer welfare by shifting the supply and demand curve for healthy food to the right, leading to a lower equilibrium price and a higher equilibrium quantity consumed. This is illustrated below:
| Cell | Explanation |
| Price | Initially at P1. Subsidy lowers the price to P2. |
| Quantity | Initially at Q1. Subsidy increases consumption to Q2. |
| Consumer Surplus | Increases due to lower prices. |
| Producer Surplus | May decrease if the subsidy is not designed carefully. |
| Social Welfare | Increases due to improved health outcomes and reduced healthcare costs. |
Challenges in Designing an Effective Subsidy Scheme:
- Targeting: Ensuring the subsidy reaches those who need it most (e.g., low-income households). A blanket subsidy may benefit wealthier consumers disproportionately.
- Distortion of Markets: The subsidy could distort the market, leading to inefficient allocation of resources. It might encourage the production of unhealthy substitutes.
- Administrative Costs: Administering a subsidy scheme can be complex and costly.
- Potential for Fraud: There is a risk of fraud and abuse, such as individuals claiming eligibility for the subsidy who are not entitled to it.
Measures to Address These Challenges:
- Means-tested subsidies: Target the subsidy to low-income households only.
- Specific Food Subsidies: Focus on subsidizing specific healthy foods (e.g., fruits, vegetables) rather than all healthy foods.
- Clear Eligibility Criteria: Establish clear and transparent eligibility criteria to prevent fraud.
- Effective Monitoring and Enforcement: Implement robust monitoring and enforcement mechanisms to prevent abuse.
- Public Awareness Campaigns: Combine the subsidy with public awareness campaigns to promote healthy eating habits.
Conclusion: A price subsidy on healthy food has the potential to improve consumer welfare, but it is crucial to design the scheme carefully to address the potential challenges and ensure that the benefits are realized effectively. A combination of policy measures, including subsidies, education, and regulation, is often the most effective approach.